SELF-EMPLOYMENT

SEC. 211. [42 U.S.C. 411] For the purposes of
this title—

Net Earnings From Self-Employment

(a) The term “net earnings from self-employment” means the gross
income, as computed under subtitle A of the Internal Revenue Code of 1986, derived
by an individual from any trade or business carried on by such individual, less
the deductions allowed under such subtitle which are attributable to such trade
or business, plus his distributive share (whether or not distributed) of the
ordinary net income or loss, as computed under section 702(a)(8) of such Code,
from any trade or business carried on by a partnership of which he is a member;
except that in computing such gross income and deductions and such distributive
share of partnership ordinary net income or loss—

(1) There shall be excluded rentals from real estate and
from personal property leased with the real estate (including such rentals
paid in crop shares), together with the deductions attributable thereto, unless
such rentals are received in the course of a trade or business as a real estate
dealer; except that the preceding provisions of this paragraph shall not apply
to any income derived by the owner or tenant of land if (A) such income is
derived under an arrangement, between the owner or tenant and another individual,
which provides that such other individual shall produce agricultural or horticultural
commodities (including livestock, bees, poultry, and fur-bearing animals and
wildlife) on such land, and that there shall be material participation by
the owner or tenant (as determined without regard to any activities of an
agent of such owner or tenant) in the production or the management of the
production of such agricultural or horticultural commodities, and (B) there
is material participation by the owner or tenant (as determined without regard
to any activities of an agent of such owner or tenant) with respect to any
such agricultural or horticultural commodity;

(2) There shall be excluded dividends on any share of stock,
and interest on any bond, debenture, note, or certificate, or other evidence
of indebtedness, issued with interest coupons or in registered form by any
corporation (including one issued by a government or political subdivision
thereof), unless such dividends and interest are received in the course of
a trade or business as a dealer in stocks or securities;

(3) There shall be excluded any gain or loss (A) which is
considered under subtitle A of the Internal Revenue Code of 1986 as gain or
loss from the sale or exchange of a capital asset, (B) from the cutting of
timber, or the disposal of timber, coal, or iron ore, if section 631 of the
Internal Revenue Code of 1954 applies to such gain or loss, or (C) from the
sale, exchange, involuntary conversion, or other disposition of property if
such property is neither (i) stock in trade or other property of a kind which
would properly be includible in inventory if on hand at the close of the taxable
year, nor (ii) property held primarily for sale to customers in the ordinary
course of the trade or business;

(4) The deduction for net operating losses provided in section
172 of the Internal Revenue Code of 1986[173] shall not be allowed;

(5)(A) If any of the income derived from
a trade or business (other than a trade or business carried on by a partnership)
is community income under community property laws applicable to such income,
the gross income and deductions attributable to such trade or business shall
be treated as the gross income and deductions of the spouse carrying on such
trade or business or, if such trade or business is jointly operated, treated
as the gross income and deductions of each spouse on the basis of their respective
distributive share of the gross income and deductions;[174]

(B) If any portion of a partner's distributive share of
the ordinary net income or loss from a trade or business carried on by a partnership
is community income or loss under the community property laws applicable to
such share, all of such distributive share shall be included in computing
the net earnings from self-employment of such partner, and no part of such
share shall be taken into account in computing the net earnings from self-employment
of the spouse of such partner;

(6) A resident of the Commonwealth of Puerto Rico shall compute
his net earnings from self-employment in the same manner as a citizen of the
United States but without regard to the provisions of section 933 of the Internal
Revenue Code of 1986[175];

(7) An individual who is a duly ordained, commissioned, or
licensed minister of a church or a member of a religious order shall compute
his net earnings from self-employment derived from the performance of service
described in subsection (c)(4) without regard to section 107 (relating to
rental value of parsonages), section 119 (relating to meals and lodging furnished
for the convenience of the employer), and section 911 (relating to earned
income from sources without the United States) of the Internal Revenue Code
of 1986, but shall not include in any such net earnings from self-employment
the rental value of any parsonage or any parsonage allowance (whether or not
excluded under section 107 of the Internal Revenue Code of 1986) provided
after the individual retires, or any other retirement benefit received by
such individual from a church plan (as defined in section 414(e) of such Code)
after the individual retires[176];

(8) The exclusion from gross income provided by section 931
of the Internal Revenue Code of 1986 shall not apply;

(9) There shall be excluded amounts received by a partner
pursuant to a written plan of the partnership, which meets such requirements
as are prescribed by the Secretary of the Treasury or his delegate, and which
provides for payments on account of retirement, on a periodic basis, to partners
generally or to a class or classes of partners, such payments to continue
at least until such partner's death, if—

(A) such partner rendered no services with respect to
any trade or business carried on by such partnership (or its successors)
during the taxable year of such partnership (or its successors), ending
within or with his taxable year, in which such amounts were received,
and

(B) no obligation exists (as of the close of the partnership's
taxable year referred to in subparagraph (A)) from the other partners
to such partner except with respect to retirement payments under such
plan, and

(C) such partner's share, if any, of the capital of
the partnership has been paid to him in full before the close of the partnership's
taxable year referred to in subparagraph (A);

(10) The exclusion from gross income provided by section
911(a)(1) of the Internal Revenue Code of 1954[177] shall not apply;

(11) In lieu of the deduction provided by section 164(f)
of the Internal Revenue Code of 1986[178] (relating to deduction for one-half of self-employment
taxes), there shall be allowed a deduction equal to the product of—

(A) the taxpayer's net earnings from self-employment
for the taxable year (determined without regard to this paragraph), and

(B) one-half of the sum of the rates imposed by subsections
(a) and (b) of section 1401 of such Code[179] for such year;

(12) There shall be excluded the distributive share of any
item of income or loss of a limited partner, as such, other than guaranteed
payments described in section 707(c) of the Internal Revenue Code of 1986[180] to that partner for services actually rendered
to or on behalf of the partnership to the extent that those payments are established
to be in the nature of remuneration for those services;

(13) In the case of church employee income, the special
rules of subsection (i)(1) shall apply;

(14) There shall be excluded income excluded from taxation
under section 7873 of the Internal Revenue Code of 1986[181] (relating to income derived by Indians from
exercise of fishing rights); and

(15) The deduction under section 162(l)[182] (relating to health insurance costs of self-employed
individuals) shall not be allowed.

If the taxable year of a partner is different from that of the partnership,
the distributive share which he is required to include in computing his net
earnings from self-employment shall be based upon the ordinary net income or
loss of the partnership for any taxable year of the partnership (even though
beginning prior to 1951) ending within or with his taxable year. In the case
of any trade or business which is carried on by an individual or by a partnership
and in which, if such trade or business were carried on exclusively by employees,
the major portion of the services would constitute agricultural labor as defined
in section 210(f)—

(i) in the case of an individual, if the gross income derived
by him from such trade or business is not more than $2,400, the net earnings
from self-employment derived by him from such trade or business may, at his
option, be deemed to be 66 2/3 percent of such gross income; or

(ii) in the case of an individual, if the gross income
derived by him from such trade or business is more than $2,400 and the net
earnings from self-employment derived by him from such trade or business (computed
under this subsection without regard to this sentence) are less than $1,600,
the net earnings from self-employment derived by him from such trade or business
may, at his option, be deemed to be $1,600; and

(iii) in the case of a member of a partnership, if his
distributive share of the gross income of the partnership derived from such
trade or business (after such gross income has been reduced by the sum of
all payments to which section 707(c) of the Internal Revenue Code of 1986[183] applies) is not more than $2,400, his distributive
share of income described in section 702(a)(8) of such Code derived from such
trade or business may, at his option, be deemed to be an amount equal to 66
2/3 percent of his distributive share of such gross income (after such gross
income has been so reduced); or

(iv) in the case of a member of a partnership, if his
distributive share of the gross income of the partnership derived from such
trade or business (after such gross income has been reduced by the sum of
all payments to which section 707(c) of the Internal Revenue Code of 1986
applies) is more than $2,400 and his distributive share (whether or not distributed)
of income described in section 702(a)(8) of such Code derived from such trade
or business (computed under this subsection without regard to this sentence)
is less than $1,600, his distributive share of income described in such section
702(a)(8)
derived from such trade or business may, at his option, be deemed to be $1,600.

For purposes of the preceding sentence, gross income means—

(v) in the case of any such trade or business in which
the income is computed under a cash receipts and disbursements method, the
gross receipts from such trade or business reduced by the cost or other basis
of property which was purchased and sold in carrying on such trade or business,
adjusted (after such reduction) in accordance with the provisions of paragraphs
(1) through (6) and paragraph (8) of this subsection; and

(vi) in the case of any such trade or business in which
the income is computed under an accrual method, the gross income from such
trade or business, adjusted in accordance with the provisions of paragraphs
(1) through (6) and paragraph (8) of this subsection;

and, for purposes of such sentence, if an individual (including a member of
a partnership) derives gross income from more than one such trade or business,
such gross income (including his distributive share of the gross income of any
partnership derived from any such trade or business) shall be deemed to have
been derived from one trade or business.

The preceding sentence and clauses (i) through (iv) of the second preceding
sentence shall also apply in the case of any trade or business (other than a
trade or business specified in such second preceding sentence) which is carried
on by an individual who is self-employed on a regular basis as defined in subsection
(g), or by a partnership of which an individual is a member on a regular basis
as defined in subsection (g), but only if such individual's net earnings from
self-employment in the taxable year as determined without regard to this sentence
are less than $1,600 and less than 66 2/3 percent of the sum (in such taxable
year) of such individual's gross income derived from all trades or businesses
carried on by him and his distributive share of the income or loss from all
trades or businesses carried on by all the partnerships of which he is a member;
except that this sentence shall not apply to more than 5 taxable years in the
case of any individual, and in no case in which an individual elects to determine
the amount of his net earnings from self-employment for a taxable year under
the provisions of the two preceding sentences with respect to a trade or business
to which the second preceding sentence applies and with respect to a trade or
business to which this sentence applies shall such net earnings for such year
exceed $1,600.

Self-Employment Income

(b) The term “self-employment income” means the net earnings
from self-employment derived by an individual (other than a nonresident alien
individual, except as provided by an agreement under section 233) during any taxable
year beginning after 1950; except that such term shall not include—

(1) That part of the net earnings from self-employment which
is in excess of—

(A) For any taxable year ending prior to 1955, (i) $3,600,
minus (ii) the amount of the wages paid to such individual during the
taxable year; and

(B) For any taxable year ending after 1954 and prior
to 1959, (i) $4,200, minus (ii) the amount of the wages paid to such individual
during the taxable year; and

(C) For any taxable year ending after 1958 and prior
to 1966, (i) $4,800, minus (ii) the amount of the wages paid to such individual
during the taxable year; and

(D) For any taxable year ending after 1965 and prior
to 1968, (i) $6,600, minus (ii) the amount of the wages paid to such individual
during the taxable year; and

(E) For any taxable year ending after 1967 and beginning
prior to 1972, (i) $7,800, minus (ii) the amount of the wages paid to
such individual during the taxable year; and

(F) For any taxable year beginning after 1971 and prior
to 1973, (i) $9,000, minus (ii) the amount of the wages paid to such individual
during the taxable year; and

(G) For any taxable year beginning after 1972 and prior
to 1974, (i) $10,800, minus (ii) the amount of the wages paid to such
individual during the taxable year; and

(H) For any taxable year beginning after 1973 and prior
to 1975, (i) $13,200, minus (ii) the amount of the wages paid to such
individual during the taxable year; and

(I) For any taxable year beginning in any calendar year
after 1974, (i) an amount equal to the contribution and benefit base (as
determined under section 230) which is
effective for such calendar year, minus (ii) the amount of the wages paid
to such individual during such taxable year; or

(2) The net earnings from self-employment, if such net earnings
for the taxable year are less than $400.

An individual who is not a citizen of the United States but who is a resident
of the Commonwealth of Puerto Rico, the Virgin Islands, Guam, or American Samoa
shall not, for the purposes of this subsection, be considered to be a nonresident
alien individual. In the case of church employee income, the special rules of
subsection (i)(2) shall apply for purposes of paragraph (2).

Trade or Business

(c) The term “trade or business”, when used with reference to
self-employment income or net earnings from self-employment, shall have the
same meaning as when used in section 162 of the Internal Revenue Code of 1986[184], except that such term shall not include—

(1) The performance of the functions of a public office,
other than the functions of a public office of a State or a political subdivision
thereof with respect to fees received in any period in which the functions
are performed in a position compensated solely on a fee basis and in which
such functions are not covered under an agreement entered into by such State
and the Commissioner of Social Security pursuant to section 218;

(2) The performance of service by an individual as an employee,
other than—

(A) service described in section 210(a)(14)(B)
performed by an individual who has attained the age of eighteen,

(E) service performed by an individual as an employee
of a State or a political subdivision thereof in a position compensated
solely on a fee basis with respect to fees received in any period in which
such service is not covered under an agreement entered into by such State
and the Commissioner of Social Security pursuant to section 218,

(3) The performance of service by an individual as an employee
or employee representative as defined in section 3231 of the Internal Revenue
Code of 1986[185];

(4) The performance of service by a duly ordained, commissioned,
or licensed minister of a church in the exercise of his ministry or by a member
of a religious order in the exercise of duties required by such order;

(5) The performance of service by an individual in the exercise
of his profession as a Christian Science practitioner; or

(6) The performance of service by an individual during the
period for which an exemption under section 1402(g) of the Internal Revenue
Code of 1986[186] is effective with respect to him.

The provisions of paragraph (4) or (5) shall not apply to service (other than
service performed by a member of a religious order who has taken a vow of poverty
as a member of such order) performed by an individual unless an exemption under
section 1402(e) of the Internal Revenue Code of 1986 is effective with respect
to him.

Partnership and Partner

(d) The term “partnership” and the term “partner” shall have
the same meaning as when used in subchapter K of chapter 1 of the Internal Revenue
Code of 1986.

Taxable Year

(e) The term “taxable year” shall have the same meaning as when
used in subtitle A of the Internal Revenue Code of 1986; and the taxable year
of any individual shall be a calendar year unless he has a different taxable
year for the purposes of subtitle A of such Code, in which case his taxable
year for the purposes of this title shall be the same as his taxable year under
such subtitle A.

Partner's Taxable Year Ending as Result of Death

(f) In computing a partner's net earnings from self-employment
for his taxable year which ends as a result of his death (but only if such taxable
year ends within, and not with, the taxable year of the partnership), there
shall be included so much of the deceased partner's distributive share of the
partnership's ordinary income or loss for the partnership taxable year as is
not attributable to an interest in the partnership during any period beginning
on or after the first day of the first calendar month following the month in
which such partner died. For purposes of this subsection—

(1) in determining the portion of the distributive share
which is attributable to any period specified in the preceding sentence, the
ordinary income or loss of the partnership shall be treated as having been
realized or sustained ratably over the partnership taxable year; and

(2) the term “deceased partner's distributive share” includes
the share of his estate or of any other person succeeding, by reason of his
death, to rights with respect to his partnership interest.

Regular Basis

(g) An individual shall be deemed to be self-employed on a regular
basis in a taxable year, or to be a member of a partnership on a regular basis
in such year, if he had net earnings from self-employment, as defined in the
first sentence of subsection (a), of not less than $400 in at least two of the
three consecutive taxable years immediately preceding such taxable year from
trades or businesses carried on by such individual or such partnership.

(h)(1) In determining the net earnings from self-employment
of any options dealer or commodities dealer—

(A) notwithstanding subsection (a)(3)(A), there shall not
be excluded any gain or loss (in the normal course of the taxpayer's activity
of dealing in or trading section 1256 contracts) from section 1256 contracts
or property related to such contracts, and

(B) the deduction provided by section 1202 of the Internal
Revenue Code of 1986 shall not apply.

(A) The term “options dealer” has the meaning given such
term by section 1256(g)(8) of such Code[187].

(B) The term “commodities dealer” means a person who is
actively engaged in trading section 1256 contracts and is registered with
a domestic board of trade which is designated as a contract market by the
Commodities Futures Trading Commission.

(C) The term “section 1256 contracts” has the meaning given
to such term by section 1256(b) of such Code.

(B) In applying subsection (b)(2) to church employee income,
“$100” shall be substituted for “$400”.

(3) Paragraph (1) shall not apply to any amount allowable as
a deduction under subsection (a)(11), and paragraph (1) shall be applied before
determining the amount so allowable.

(4) For purposes of this section, the term “church employee
income” means gross income for services which are described in section 210(a)(8)(B)
(and are not described in section 210(a)(8)(A)).

Codification of Treatment of Certain Termination
Payments Received by Former Insurance Salesmen

(j) Nothing in subsection (a) shall be construed as including
in the net earnings from self-employment of an individual any amount received
during the taxable year from an insurance company on account of services performed
by such individual as an insurance salesman for such company if—

(1) such amount is received after termination of such
individual's agreement to perform such services for such company,

(2) such individual performs no services for such company
after such termination and before the close of such taxable year,

(3) such individual enters into a covenant not to compete
against such company which applies to at least the 1-year period beginning
on the date of such termination, and

(A) depends primarily on policies sold by or credited
to the account of such individual during the last year of such agreement
or the extent to which such policies remain in force for some period
after such termination, or both, and

(B) does not depend to any extent on length of service
or overall earnings from services performed for such company (without
regard to whether eligibility for payment depends on length of service).

[174] P.L. 108-203, §423(c), struck out “all of the
gross income and deductions attributable to such trade or business shall be
treated as the gross income and deductions of the husband unless the wife exercises
substantially all of the management and control of such trade or business, in
which case all of such gross income and deductions shall be treated as the gross
income and deductions of the wife;” and substituted “the gross income and deductions
attributable to such trade or business shall be treated as the gross income
and deductions of the spouse carrying on such trade or business or, if such
trade or business is jointly operated, treated as the gross income and deductions
of each spouse on the basis of their respective distributive share of the gross
income and deductions;”, effective March 2, 2004.

[176] P.L. 108-203, §422(a), inserted “, but shall not
include in any such net earnings from self-employment the rental value of any
parsonage or any parsonage allowance (whether or not excluded under section
107 of the Internal Revenue Code of 1986) provided after the individual retires,
or any other retirement benefit received by such individual from a church plan
(as defined in section 414(e) of such Code) after the individual retires”, applicable
to the years beginning before, on, or after December 31, 1994.